Articles 101 views March 13, 2020

What Happens If You Stop Paying Life Insurance Premiums

Life insurance is defined as an agreement between the insurer and the policyholder, in which the company or the insurer pays the benefits after a definite time or on the death of the policyholder in lieu of an amount, known as premium which is to be paid by the policyholder for a certain period. Life insurance coverages protect the insured or the policyholder’s family from sudden financial burden in case of any unfortunate incident. Premium or Life insurance premiums, therefore, plays a significant or rather the most important role here for you to get the benefits of the policy. This essentially means that you have to pay all the premiums on time so that the insurer will be in a position to provide all the benefits as per the plan chosen.

Term Insurance

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Now a very important question is what happens when you do not pay your life insurance premiums? Does your policy lapse? Can the lapsed policy be restored? Should you be buying a new one in case the policy is not restored by the insurer? Well, let us see the answers to these questions below one by one.

Does your policy lapse?

All term life insurance plans allow a grace period of 30 days for paying of Life insurance premiums. This is as per the rules laid down by IRDA- The Insurance Regulatory Development Authority of India. Your life insurance policy will not lapse if you are paying your Life insurance premiums within the grace period. Insurers understand the fact that it may not be always possible for the policyholders to pay the Life insurance premiums before the due date and hence they need some extra number of days in making the payment.

An important point to keep in mind is that every insurer has its guiding principle, and hence you must take note of the grace period in the policy and its related rules. Also, if anything happens to you during this grace period, your policy will still cover your family and will remain a valid one.

The concept of lapse is also dependant on another important factor is the type of insurance which you have chosen. For a Term Insurance, if you fail to pay the Life insurance premiums before the due date, your policy lapses thereby forfeiting the benefits as well as the premiums paid till such date. On the other hand, for ULIPs- Unit-Linked Insurance Plans, if you do not pay the Life insurance premiums in the first 5 years which is the bare minimum duration of the premium payment term, your policy will be considered as lapsed. All your benefits, therefore, move to a discontinuance fund which you can get only after the lock-in period.

Can the Lapsed Policy be Restored or Reinstated?

If you are unable to pay the Life insurance premiums during the grace period also, you need not worry about the same. There is an option of restoring or reinstating your life insurance policy within a certain timeframe. Point to note here, that this process of restoration may turn out to be more expensive with penalties and you may have to undergo several medical tests. Again, this process varies from insurer to insurer and is dependent on the type of policy that you are holding, the cost of the insurance, etc. You will have to remember the below aspects.

  1. Application for Reinstatement: All insurers will ask you to submit this and is like the original application which you have filled up at the time of the inception of the policy.
  2. Proof of continuous insurability: Insurer will ask you to submit the proof of continuous insurability and the same also varies from every insurer and is dependent on the time passed.
  3. Statement of Health: Most insurers will ask you to undergo medical tests to see whether your health condition is ok or not.
  4. Duration of Lapse: The point of reinstatement of your policy is dependent on the point as to how much time your policy was in a lapsed state.

According to the law of Insurance, insurers will allow you to restore your policy till 2 years if the policy was in force for a minimum of 3 years with a penalty interest of 12% -18% of the entire premium. Hence, if you delay more in paying the life insurance premiums, the chances of restoration will go down. The process becomes simple if you revive your policy within 6 months of the lapse of your policy.

Should you be buying a new one in case the policy is not restored by the insurer?

Reinstating the life insurance policy will always be a better plan rather than buying a new plan. Remember, for term plans, the amount of premium increases with age and it will be difficult for you to again continue with it. Let us take an example to see the same.

Rahul, when he was 28 years of age, has bought a term plan to get coverage until 80 years with a yearly premium of INR 10000. Later, he paid premiums for only 3 years as he was having a financial constraint and therefore his policy lapsed. Rahul paid a total premium of INR 30000 in 3 years. So, as per the above study, he has two choices, one being reinstating the policy and the other is opting for a new policy. Rahul wants to appraise the plan after 3 years of the last life insurance premium which he has paid. The company will ask him to pay a fee for renewal with late fees and with interest amount for the premiums which were due for the last 3 years, the amount which may be INR 36000-INR 40000.

On the other hand, if Rahul decides to have a fresh policy, he will have to pay a life insurance premium of INR 14000 yearly. So, technically he is losing on the paid premiums for 3 years in the past and also there is an increase in the cost of insurance by INR 4000 (INR 14000-INR 10000) which is not desirable as this is going to make quite a difference in the coming days. Hence, reinstation will be a better choice rather than going for a new policy.

Conclusion

Think properly, compare the unseen financial loss between your current policy and the new one if you are thinking for and then make a decision. Reinstatement is always a better choice. Do keep your insurance policies active. Remember, by paying life insurance premiums, you are ensuring financial security for your loved ones and any failure in doing so may result in a big disaster.

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